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States v. Koudanis

United States District Court, D. Massachusetts

September 15, 2016

UNITED STATES OF AMERICA
v.
NICHOLAS KOUDANIS, NICHOLAS MARKOS, ELENI KOUDANIS, and STEVEN KOUDANIS, Defendants.

          MEMORANDUM AND ORDER

          Patti B. Saris Chief United States District Judge.

         INTRODUCTION

         Defendants, owners and operators of Nick's Famous Roast Beef in Beverly, Massachusetts, have been indicted in an alleged tax evasion scheme. The scheme purportedly involved the defendants underreporting cash income generated at the restaurant during the 2008-2013 tax years and subsequently fabricating cash receipts during an IRS audit. Defendants Nicholas Koudanis, Eleni Koudanis, and Steven Koudanis have moved for a Franks hearing and to suppress evidence gathered by the government during the December 11, 2014 searches of the restaurant and the Koudanis residence. The defendants argue that the affidavit submitted in support of the search warrant application contained material misstatements and omitted material information that the affiant either knew about or could have learned if he had performed a further investigation. Because the defendants have not made a substantial showing (1) that the affiant acted intentionally or recklessly with regard to the alleged misstatements or omissions and (2) that probable cause would be lacking had these misstatements been excluded or the omissions included, the defendants' motion for a Franks hearing and to suppress (Docket No. 65) is DENIED.

         FACTUAL BACKGROUND

         Nick's Famous Roast Beef (Nick's), located in Beverly, Massachusetts, opened in 1975 and specializes in roast beef sandwiches and fried foods. Nicholas Koudanis (Koudanis) and Nicholas Markos (Markos) each own one-half of the restaurant and are responsible for the restaurant's daily operations. Eleni Koudanis, Nicholas Koudanis's wife, manages the business's books. Steven Koudanis, son of Nicholas and Eleni Koudanis, works in the restaurant.

         On December 9, 2014, Magistrate Judge Page Kelley issued warrants to search the restaurant and the home of Nicholas and Eleni Koudanis. The warrant applications relied on an affidavit prepared by IRS Special Agent William Noonan. Agent Noonan presented the following facts in his affidavit to the magistrate judge.

         Based on Noonan's investigation, Nick's received gross cash income far in excess of what it reported to the IRS. Noonan stated that the defendants sought to conceal these tax underpayments in two ways. First, Nick's is a cash business. It only accepts cash and it has an ATM for customers to use. It also pays for many of its roast beef shipments in cash. This allows Nick's to declare that its expenses are less than they actually are. By declaring less in the way of expenses, Nick's can more easily justify its underreporting in the way of income. Second, and relatedly, the defendants use a second cash register to fabricate cash receipts. The fake receipts, showing less income than was received, were then used to prepare Nick's tax filings.

         Noonan estimated that Nick's gross receipts were approximately $2 million more per year than it reported on its tax returns. Noonan learned that this additional income was used by Koudanis and his sons to purchase real estate, nearly $800, 000 of which was paid for in cash, far in excess of what they reported as income on their tax returns.

         In reaching these conclusions, Agent Noonan relied primarily on two confidential informants (CIs), with corroboration from other witnesses, documents, and photographs. Each CI independently contacted the IRS Whistleblower Office about the alleged tax fraud. CI 1 submitted his tip in April 2010. CI 2 submitted her tip in September 2012.

         I. Confidential Informant 1

         Noonan described CI 1 as experienced in the restaurant and restaurant supply business. In 1969, CI 1 began working for a sandwich shop chain. He worked at the company's main office, where franchisees purchased their food supplies. In 1978, after nine years in this position, CI 1 purchased the food supply arm of the business. For nearly twenty years -- from 1978 to 1996 --CI 1 owned and operated this food supply business. During this period, he grew the business from $2 million in annual sales to $14 million in sales by adding numerous pizza and roast beef shops as clients. In 1996, CI 1 closed the business because of increased debt and other problems.

         Soon after, Agar Supply Company hired CI 1. When CI 1 joined Agar, he brought with him many of his former clients. Many of those clients requested that they be permitted to continue paying part of their orders in cash. Prior to the time CI 1 joined Agar, nearly all of CI 1's clients used two separate accounts for food supply purchases: a cash account and a check account. The clients would report only purchases made by check on their tax returns. Purchases made in cash went unreported to the IRS. When CI 1 joined Agar, many of the clients he retained sought this same treatment from Agar. Ultimately, in 2002, Agar gave CI 1 its blessing to use cash accounts in hopes that it would drive up sales. CI 1 provided Noonan with copies of Agar records confirming the cash account practice. CI 1 stated that Agar employed the two-account system from at least 2002 to 2006.

         After implementing the two-account system, Agar hired additional salespersons to oversee the increased demand. In 2004, Agar hired Flora Papadopolous, who had previously worked in a roast beef restaurant for many years. In 2005, Agar hired another employee, Paula Hios. Hios also had experience in the roast beef business. Based on conversations with Papadopolous and Hios, CI 1 told Noonan that the two-account system continued after he was fired in 2006. He estimated that nearly 70% of Agar's clients paid some portion of their bills in cash.

         Nick's was one of Agar's clients participating in the two-account system. Nick's has been an Agar client since 2003. CI 1 told Noonan that, as of 2006, Nick's was purchasing between 50 and 60 boxes of roast beef per week from Agar. Agar delivered four shipments per week to Nick's; three of the four were paid for in cash. Based on CI 1's experience, he believed that Nick's generated $1, 000 in gross cash sales per box per week for a total of $50, 000 to $60, 000 each week in 2006.

         CI 1 no longer works at Agar; he was fired from his position in 2006. CI 1 explained to Noonan why he had been terminated. CI 1 said that Agar told CI 1 that he had not followed the company's policy requiring salespeople to deposit all cash received from customers within twenty-four hours. Agent Noonan explained in his affidavit that CI 1 was angry at Agar after it fired him. CI 1 stated that he went to work for Agar's competitors, but that his former clients declined to change suppliers. Noonan also noted that CI 1 stated that, in addition to any financial reward he might earn from his whistleblower tip, he hoped that the investigation would negatively affect Agar. Noonan ran a criminal background check on CI 1 and found only an OUI from 2012.

         On April 6, 2014, CI 1 called Hios, a former colleague of CI 1's at Agar. The call was recorded. In September 2012, after CI 1 was fired, Reinhart Foodservice, LLC, acquired Agar. Reinhart is one of the largest food distributors in the country. At the time of the 2014 phone call with CI 1, Hios worked for Reinhart. CI 1 asked Hios if Reinhart had maintained Agar's two-account system after the acquisition. Hios replied that some clients continued to use cash accounts, but no new clients were afforded the option. Hios stated that she believed the two-account system posed a significant audit risk for Reinhart's customers, particularly because Reinhart tracked total purchases, including payments made in both cash and check.

         On June 17, 2014, CI 1 met with Hios and her cousin, Peter Belesis. The meeting was recorded. Belesis also worked for Reinhart. Belesis traveled to Reinhart's client roast beef shops and advised them on how they can improve their operations. Prior to joining Reinhart, Belesis himself owned two roast beef shops. Based on these experiences, Belesis estimated that the food cost at a roast beef restaurant constitutes approximately 45% of the shop's total expenses. Belesis stated that roast beef cost about $2.50 per pound. Hios told CI 1 that, as of 2014, only a few restaurants still used a cash account at Reinhart. Nick's was one of the remaining few. Based on the recorded conversation with Hios and Belesis, Agent Noonan concluded that Nick's was doing $60, 000 to $70, 000 in business per week[1] and, because the company made $1, 000 in sales per box, Nick's was purchasing 60 to 70 boxes a week in 2014 (as opposed to between 50 and 60 in 2006 when CI 1 was still at Agar).

         II. Confidential Informant 2

         Agent Noonan's second principal source was CI 2. Noonan stated in his affidavit that CI 2 is a relative of the Koudanis family. CI 2 had visited the Koudanis residence in Topsfield, Massachusetts, on multiple occasions.

         During the summer of 2012, CI 2 personally overheard two of Koudanis's adult sons, Steven and Costas Koudanis, discussing how to use a second cash register to generate false cash receipts. The fake receipts were to be used in case of an audit. CI 2 also heard one son state that the fabricated receipts had previously proven useful during a Massachusetts Department of Revenue audit. One son explained that the Koudanis's former accountant had formulated the idea to produce a false set of cash receipts many years ago. The son said that Nick's had been doing so ever since.

         CI 2 saw the second cash register for the first time sometime before the summer of 2012. The register was located in the empty storefront adjacent to Nick's. While at Nick's, CI 2 witnessed employees traveling back and forth between the two storefronts. After watching this, CI 2 went in the neighboring space and saw the second register.

         CI 2 also saw the second cash register at the Koudanis residence multiple times in 2012. Typically, the cash register was in the basement on a small table next to a trash bag full of receipts. Noonan attached to his affidavit copies of photographs taken by CI 2 that showed the register and the trash bag of receipts. CI 2 took the photographs in July 2012. When CI 2 last visited the Koudanis residence, in May 2013, the register was there.

         During one visit to the Koudanis home, CI 2 saw the register on Steven Koudanis's desk in the Koudanis's basement. Steven was sitting at the desk keying in information. According to CI 2, Steven spent much of the day entering numbers into the register.

         CI 2 also learned -- from one of Koudanis's sons and from her own observations -- that Eleni Koudanis maintained Nick's financial records. Eleni kept all records on paper. Eleni had previously worked at a credit union and was experienced in ...


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